Business X and Business Y have the same details regarding costs:

Manufacturing overheads

1,000,000

Maximum capacity

50,000 units

Budgeted production

40,000 units

They all absorb overheads on a unit basis

Business X absorbs units based on the maximum capacity

Business Y on a budgeted production basis

Direct material is 10 per unit in each case; Direct labour 15

Selling price is 60 per unit

Budgeted Sales are 40,000 units

Calculate the unit absorption cost for X and for Y.

Which company will make the most profit?

Required:

Calculate the unit absorption cost for X and for Y.

Comment on the budgeted profit per unit in each case

Which company will make the most profit? Comment on the affect that the different methods of absorption might have on profit expectations at X as opposed to Y.